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Letter of the day: PetroCaribe Debt Buy Back: Cosmetic Economics?

Published:Wednesday | August 19, 2015 | 12:00 AM


What is the significance of reducing the debt to GDP (Gross Domestic Product) ratio, and is the Government of Jamaica too focused on debt reduction and less on economic growth?

Basic mathematical analysis indicates that there are three ways to reduce the debt to GDP ratio: reduce the debt, increase GDP, or implement measures to effect both simultaneously. The Government's economic reform programme and the recent PetroCaribe debt buy-back can be evaluated as a classic case in point. The Government recently borrowed US$2 billion on the international capital market at interest rate of seven per cent and paid US$1.5 billion to Venezuela, which resulted in a debt write-off of the remaining US$1.5 billion owed under PetroCaribe.

Comparative analysis reveals that the Petro-Caribe debt of US$3 billion at one per cent interest would cost the Government US$30 million in interest payments annually, which is US$300 million in 10 years or US$750 million in 25 years. The new loan of US$2 billion at seven per cent would expect to cost the Government US$140 million annually, which is US$1.4 billion in 10 years, and US$3.5 billion dollars in 25 years in interest payments alone! The good news, however, is that the new loan agreement has a 10-year moratorium on debt servicing. The Government is, therefore, correct. There is an INITIAL saving of US$300 million (in interest) in debt servicing that would have been expected under PetroCaribe. But even if for the first 10 years under the new loan agreement no debt-servicing is required and interest will be waived, at the end of 25 years, the total interest payments would then be US$2.1 billion, almost three times that of PetroCaribe!


nothing wrong in going deeper into debt


The debt burden long term has, therefore, been increased! But there is nothing wrong in going deeper into debt in order to get out of debt, especially when this maintains credibility rating, ensures stability, and if the additional debt or capital at one's disposal (US$500 million) is used wisely for economic stimulus. The finance minister should then be applauded.

But is enough being done to stimulate the economy and increase GDP? How many foreign investors will we readily attract with a high murder rate and low ranking on the ease-of-doing business index? Will small-and medium-size businesses grow and flourish in an environment with major disincentives like praedial larceny, high production costs, seasonal water crisis, and stifling taxation policies?